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The Morning Ledger: Mergers Face Regulatory Roadblocks

The Morning Ledger from CFO Journal cues up the most important news in corporate finance every weekday morning. Send us tips, suggestions and complaints: david.hall@wsj.com. Get The Morning Ledger emailed to you each weekday morning by clicking here. Follow us on Twitter @CFOJournal.

More mergers are running into regulatory roadblocks. Regulators under President Obama have killed, litigated or demanded changes in 86% of the deals that raised antitrust concerns between the 2009 and 2012 fiscal years, according to a Wall Street Journal analysis. That’s more than the roughly 70% of deals they red-flagged under President George W. Bush.

Companies that have ignored the trend say they have felt blindsided, writes CFOJ’s Vipal Monga in today’s Marketplace section. The latest high-profile antitrust casualty was AMR‘s American Airlines. Its executives and advisers were so confident regulators would bless the airline’s pending $11 billion tie-up with US Airways Group that they didn’t include customary protections, such as fees, for American if regulatory objections scuttled the deal. “We looked at the deal and asked lawyers about antitrust,” said one person on American’s side of the deal. “Nobody said there was an iota of a problem.”

The risk of antitrust objections has pushed some companies to spend more time negotiating protections in their merger deals. Often the company being acquired is asking for a hefty fee from the would-be buyer if their plans to combine get hung up or derailed by regulators. “The rigor with which antitrust provisions are being negotiated has increased substantially,” says Jonathan Kanter, an antitrust lawyer with Cadwalader, Wickersham & Taft. “There’s greater chance you might rely on them.”

THE DAY AHEAD:

Carnival is expected to post a drop in fiscal Q3 earnings today, as it struggles to right itself after some high-profile incidents on its cruise ships. But growth could be on the horizon, writes Ahead of the Tape’s Spencer Jakab. Carnival has a new chief executive, and passenger numbers suggest the negative publicity from mishaps has been fleeting, while the potential pool of new passengers is large. Compound annual growth in cruise berths has been nearly 6% since the turn of the century. That pace should persist for the foreseeable future. And there’s also Carnival’s new focus on Asia, a small but promising cruise market, Jakab notes. Executives cite industry projections that bookings in the region could surge sevenfold by 2020.

Fixed-to-floating deals make comeback. Interest rates have fallen since the Fed decided to stick with its bond-buying program. But expectations that rates will be rising in a few years continue to shape the market for corporate bonds and preferred securities, spurring companies to offer so-called fixed-to-floating securities, writes Emily Chasan. This year has been the best for fixed-to-floating deals since they fell out of favor during the financial crisis. Some 34 companies have raised $18.4 billion globally with them through September. The volume of fixed-to-floating securities issued this year has outpaced the $15.5 billion raised through 27 such deals in 2012. Almost none of the securities were issued during the financial crisis, and just five deals worth $2.9 billion were completed in 2011. “The market doesn’t want fixed rates forever,” said William Scapell, an investment manager at Cohen & Steers. “Securities that are fixed rate in perpetuity have very high interest-rate risk.”

Aspiring marijuana landlord hires first CFO. Promap is shifting its business model to join the regulated marijuana industry, and the months-old firm, which will soon be called Advanced Cannabis Solutions, has hired Christopher Taylor as its first finance chief. Advanced Cannabis intends to officially change its name next week, and hopes to raise capital in short order, Robert Frichtel, founder and president of the company, told Maxwell Murphy. Mr. Taylor is no stranger to the pot business. He most recently ran his own accounting firm, which specialized in auditing the books of medical-marijuana businesses in Colorado, though he says he isn’t an avid marijuana user himself. Mr. Frichtel said the company won’t engage in the production, sale or distribution of marijuana. Instead, it will use hoped-for investment funding to purchase properties where the drug is made or sold, and lease the facilities back to the owners.

CORPORATE NEWS:

BlackBerry strikes preliminary deal to go private. BlackBerry has reached a preliminary deal with one of its biggest shareholders to take the company private for about $4.7 billion, the WSJ’s Will Connors reports. Fairfax Financial signed a letter of intent with the BlackBerry board under which it could pay $9 a share in cash for the 90% of BlackBerry shares it doesn’t already own. The deal is far from complete. It is subject to six weeks of due diligence, and BlackBerry can shop the company during that period. Fairfax would still have to arrange financing. The agreement also doesn’t compel Fairfax to ultimately come forward with a firm offer, underscoring the weak negotiating position BlackBerry finds itself in. BlackBerry, on the other hand, would have to pay a breakup fee of more than $150 million if it turns to another buyer by Nov. 4.

GM debt escapes a ‘junk’ label.General Motors agreed to repurchase about $3.2 billion of preferred stock from a UAW trust, prompting Moody’s to move GM to an investment-grade debt rating, the WSJ reports. GM intends to finance the repurchase of preferred shares from the UAW trust with a large private sale of debt that would be the first unsecured placing for the company since it exited bankruptcy. The planned buyback is contingent on the auto maker’s completing an offering of senior unsecured notes by month’s end. GM said it is planning to offer notes with five-, 10- and 30-year maturities. The proposed repurchase will result in a third-quarter charge to earnings of $800 million. About $600 million is an accounting loss from the difference between face and book values of the shares. The remaining $200 million is the premium paid over face value. GM is repurchasing the preferred stock for $27 a share.

U.S. manufacturers ‘reshoring’ from China. American companies are increasingly “reshoring” manufacturing operations from China to the U.S., the FT reports. A survey by Boston Consulting Group found 21% of executives of large manufacturers were either already relocating production to the U.S., or planning to do so within two years. A further 33% said they were considering it, or would consider it in the near future. That’s a sharp increase from last year when only 10% of respondents planned to move production to the U.S. the rising cost of labor in China was the factor most commonly cited for reshoring.

Lipstick maker counts on new supply-chain software to fuel growth. To help L’Oreal meet its goal of adding one billion new customers over the next decade, the company is rolling out a new supply-chain collaboration platform. L’Oreal, which produces most of its own end products, hopes the software will allow for better communication with thousands of upstream suppliers that provide its packaging and components. “It lets us go to the market and say, ‘This we can do’ and, ‘This we cannot do.’ And we can start to look at alternative plans if we need to,” Richard Markoff, L’Oreal’s director of supply-chain standards, told CIO Journal.

REGULATION:

New lease-accounting rules face backlash. Companies are pushing back against a proposed overhaul of accounting rules for leases that could add hundreds of billions of dollars in debt to the companies’ balance sheets, the WSJ’s Michael Rapoport reports. Hundreds of companies, including big users of leases such as Gap, McDonald’s and FedEx, have sent letters objecting to the proposal to the FASB and the IASB. FedEx said it isn’t opposed to adding leases to the balance sheet, but opposes the two-track model for the income statement. “We’d like to see them pick one or the other,” said Herbert Nappier, FedEx’s corporate controller. “It’s already complex enough as it is.” The new rules would force banks to recognize many leases on their balance sheets that aren’t already there, and change how some companies account for the costs of leases in their earnings. But a broad swath of critics, including FASB’s own investor-advisory panel, now say the changes are too complicated and burdensome.

Accused ex-traders citing ‘whale’ in their defense. Two former traders at J.P. Morgan accused of overstating the value of their group’s positions are pointing the finger at Bruno Iksil, the so-called London whale, the WSJ reports. The tack could put U.S. prosecutors in the potentially awkward position of defending the actions of Mr. Iksil, who placed many of the trades that led to more than $6 billion of losses at J.P. Morgan but now is aiding the government’s efforts. The strategy also underscores how the relationship of the traders with Mr. Iksil has switched from close to combative.

CFO MOVES:

Sotheby’s said Patrick McClymont will become chief financial officer on Oct. 7, replacing William Sheridan, who is leaving the company after 17 years as its CFO. Mr. McClymont, a partner and managing director at Goldman Sachs & Co., marks the latest in a trend that began last year of companies’ appointing their investment bankers as CFO as the role becomes more focused on strategic vision. Mr. McClymont’s employment terms haven’t yet been disclosed. In 2012, Mr. Sheridan received compensation valued at $1.9 million, including a salary of $600,000, a stock award valued at $588,211 and a cash bonus of $495,000, according to Sotheby’s most recent proxy statement.

Knoll, a furniture and textiles maker, named Craig Spray as CFO, effective on Monday, replacing Barry McCabe, who is retiring after 22 years with the company but will stay with Knoll through a transition period. Mr. Spray was most recently CFO of MasterBrand Cabinets Inc., a division of Fortune Brands Home & Security Inc. Mr. Spray will receive a base salary of $325,000, according to a regulatory filing, and a bonus targeted at 100% of his salary, of which $200,000 is guaranteed unless he is terminated for “cause” or resigns before mid-February. He will also receive a lump-sum relocation payment of $75,000 and reimbursement over the balance of the year of up to $3,000 a month in temporary living expenses. In addition he will be given a grant of 110,000 restricted shares that vest over three years.

Deloitte's Financial Reporting Alert discusses certain key accounting and financial reporting considerations related to the current economic conditions in the eurozone and Puerto Rico, including a summary of financial reporting implications that would result from a country's decision to exit the eurozone and an outline of disclosures recommended by the SEC in 2012 about European sovereign debt.